LOAN ASSOCIATION V. TOPEKA

After the Civil War, capital-scarce states and
localities continued the antebellum practice of
granting subsidies to encourage business enterprise.
Railroads were the principal beneficiaries
of such aid. Subsidy arrangements typically
took the form of stock subscriptions by
local governments, which were paid for by the
issuance of negotiable bonds. The bonds were
serviced by revenue raised from taxation. State
courts generally upheld financial assistance to
railroads but insisted that taxes could only be
levied for a public purpose. Although not expressly
written in federal or state constitutions,
this requirement was viewed by judges as an
inherent principle of republican government.
As state and local governments lavished aid
on businesses, however, courts occasionally
groped to fashion some limit on the power of
taxation.

Loan Association v. Topeka (1874) marked
the Supreme Court's endorsement of the public
purpose doctrine as a means of restricting
grants of public revenue to private enterprise.
As authorized by state law, the city of Topeka
donated municipal bonds to an ironworks
company to encourage that business to establish
shops in the city. The city soon ceased
making interest payments. When a bondholder
in Ohio sued to collect interest on
these bonds, the Supreme Court was called
upon to consider the validity of such subsidy
arrangements.

Stressing that there were limits on governmental
power that "grow out of the essential
nature of all free governments," the Supreme
Court, in an opinion by Justice Samuel F. Miller,
warned: "Of all the powers conferred upon
government that of taxation is most liable to
abuse." Miller ruled that "there can be no lawful
tax which is not laid for a public purpose."
He then concluded that taxation to aid manufacturing
was not for a public purpose and
that the municipal bonds were therefore invalid.
In reaching this result, Miller was clearly
influenced by the perceived excesses of public
aid to railroads and seemed determined to
draw the line against grants of public revenue
to other types of private business. Dissenting
alone, Justice Nathan Clifford maintained that
courts could only strike down state laws that
violated specific constitutional provisions and
that it was inappropriate for courts to rely on
vague theories of government to curb state
legislative taxing authority.

Following Loan Association the public purpose
doctrine was sometimes invoked to curb
use of the tax power to subsidize business enterprise.
Moreover, the ruling made clear that
the Supreme Court distrusted the judgment
of state authorities concerning disbursement
of tax revenue and was prepared to render
an independent assessment about which projects
were for a public purpose. The decision
is also significant because the Supreme Court
accepted the premise that legitimate government
was restrained by certain fundamental
if unwritten principles. Thus Loan Association
paved the way for the Supreme Court
to adopt a substantive reading of the due process
clauses in the late nineteenth century.
Lastly, the case demonstrated that the Court
in the late nineteenth century was not following
a monolithic course of assisting business
enterprise.

James W. Ely Jr.
Vanderbilt University

Fairman, Charles. History of the Supreme Court of the United States. Vol. 6, Reconstruction and Reunion, 1864– 88. New York: Macmillan Publishing Company, 1971.